Saturday, December 13, 2008

In addition to the technical factors which have brought on the financial crisis - the huge speculative bubble and leverage, derivatives, fractional reserve banking, spending beyond our means, etc. - there is another major factor.

Trust is the oil in the engine of capitalism, without it, the engine seizes up.

Confidence is like the gasoline, without it the machine won't move.

Trust is gone: there is no longer trust between counterparties in the financial system. Furthermore, confidence is at a low. Investors have lost their confidence in the ability of shares to provide decent returns (since they haven't).

This is now a PSYCHOLOGICAL problem."

Understandably, the Fed's refusal to disclose who it gave $2 trillion in loans to, and Paulson's failure to disclose what Treasury is doing (even to the official Congressional TARP oversight committee) are adding to investor and taxpayer distrust. Obviously, they need to start disclosing what they're doing.

And the big financial institutions don't trust each other, because they know that all of the other companies might have hidden their problems or gamed their books. See this, this and this.

Bigger Context

But these facts cannot be taken in a vacuum.

Remember, every time Paulson, Bernanke or Bush open their mouths, the stock market dives (see this and this).

Why?

Well, what if - on your way to the bank - you happen to see your normal banker mug an old lady and steal her purse? Would you then proceed to the bank as if nothing had happened, and give your money to that banker?

Probably not.

Similarly, Americans' trust in our leaders and our systems have collapsed. Whether or not Americans think much about it, we all know that Bush lied us into war in Iraq with false claims about WMDs. We know that the Bush administration has implemented a widespread torture policy, and lied about it. We know that our government has been spying on us for years, but lied about it. We know that our intelligence and military should have stopped the 9/11 attacks, that the official story about 9/11 is very shaky, and that something must have been very wrong to allow them to succeed.

So How Do We Restore Trust?

Even though it is contrary to conventional wisdom, I would argue that we need war crimes trials against those who authorized America's torture program to restore our trust in our government and its leaders. We need real investigations and full disclosures about the WMD propaganda, spying and 9/11.

Everyone knows about these things anyway, but the lies and cover-ups have eaten away at our trust in a profound way.

As counterintuitive as this may sound, the festering distrust which is killing our economy will not ease until the truth about these abuses by our government are aired.

Rather than dragging the markets down with pessimism, airing the truth will restore our trust in our government, our leaders and our systems, and allow us to start to rebuild our economy and our financial system.

"We were wrong" are the three magic words which can start to end the cancer of distrust and begin to revive our economy.

If you are an economist, psychologist, sociologist or historian with expertise in market psychology, I would appreciate your input.

7 comments:

This is false. Markets are only partially controlled by psychology; capital is what makes and drives a market. Without freely moving capital and sound money psychology is irrelevant. Its like having a crack software developer and telling him to write programmes without a computer. This crisis is caused (deliberately) by a distortion of market fundamentals (interest rates set high, the money supply (which is now secret; google 'M3 federal reserve no longer publish'), and regulation), everything except the regulation being done by an unaccountable, unaudited, private central bank: the Federal Reserve.

No amount of good will, good vibes, trust or any other good feeling can stop an avalanche from happening or stop 2+2=4 and this is what economics is about; it is a science like physics that has rules. Psychology is part of the equation but it is not the whole equation, an without the other parts it, by itself is meaningless. How you FEEL about the value of the dollar is irrelevant. If that were not the case, it would be possible to print an infinite number of dollars and have its value unchanged.

You do not have to be an economist to understand that printing money leads to inflation; once you have it explained to you it is simple to understand, yet, there are academics out there who simply will not face the facts of what is going on. They are normally americans who are ostrich posturing about the inevitable demise of their empire and status.

If this were a problem that was only about psychology, the election of Obama would have been enough to turn everything around 180°; not only that, but the fundamentals would all be sound. The fact is that the fundamentals are completely bad and this is the true cause of the problem.

As for the markets going up and down when politicians speak, this happens all the time, no matter who is speaking. The short term fluctuations are not what is important; the long term decline is what the problem is, and the longer the stretch of time you examine, the less important the psychology factor becomes.

I find the 'its all in everyone's mind', 'we are talking ourselves into a depression' explanation baffling. The emperor has no clothes. Everyone needs to DEAL with it and stop the magical / wishful thinking.

Psychology. You gotta be kidding me. The blog talks about the lies connected with the war, spying on us, 911 etc. What about the lies connected with the current economic crisis. The whole mortgage scheme was built on a wall of lies by every vender in the chain. The whole slice and dice was designed to be so complex and unrateable that even supposedly smart money managers got suckered in.

Fear might be a better word than psychology. When you have no way of knowing how bad a problem really is you have little choice than to fall into protection mode. People have watched their jobs, their retirements, their savings , their lives,their house vaporize in a heart beat.

Yet they are shown daily the guys that created the problem receiving millions and millions in bonuses and some even with money from the bailout fund.

I believe the common folk are being motivated by fear and anger, psychology has little to do with it. The facts on the ground demand fear and anger not psychobabble.

I am neither a conventional economist, psychologist, sociologist or historian; and frankly, in my opinion, there are no conventional economists, psychologists, sociologists or historians who -- in my opinion -- have the slightest expertise in the growth of a humane 'citizen' market psychology.

That there are plausibly a significant number of aforementioned with exceptional expertise in the growth of inhumane robotoids, automaton 'consumer' zombie market psychology (plausibly great fans of the insecure, manipulative passive aggressive psychopath Edward Bernays).

It appears plausible however that these passive aggressive, insecure, manipulative psychopath 'experts', educated by the 'speak with forked tongue' factories, and his mob of passive aggressive, insecure, manipulating mob followers, failed to include the exponential function's boomerang effect; of the day they are swamped by angry, passive aggressive, manipulative angry mobs; when the finite resources run out, to continue providing their growing mob of 'consumers' with 'consumer' opiates distractions.

With that said, herewith my opinions:

Based upon my definitions of the terms 'trust', 'restore' and 'economy';

I do not think it is useful to discuss restoring something that did not exist in the first place. As far as I am concerned there are very, very, very few people who 'trust' each other.

I will not disagree that there have been, and continue to be millions and billions who pretended to trust each other, when the going was going good; and that they now don't trust each other; indicates the possibility that the 'trust' was not real, it was fake, pretend trust.

Accordingly, if you are serious about encouraging sincere trust, then you would first be required to admit that what currently is interpreted by millions as 'trust' is not real trust, it is pretend trust.

The question then becomes why would you want to restore pretend trust? The only people who benefit from pretend trust, as those who have been benefitting from those they have been deceiving, with their 'speak with forked tongue' language, pretending that they knew what the hell they were speaking about.

There is only one CEO in America, I would invest any money in, should I have some to invest; based on my trust for him, and his product. I trust him, because he practices 100% honest, transparency, not only about his company's finances, but about his entire personal life, his sex life, everything. And NOT because he has to, or is obliged to, or because he is traded on the SEC, etc., etc., but because he believes in 100% honesty and transparency and he practices what he preaches. His name is Brad Blanton, and his company is the Center for Radical Honesty.

As for the issue of 'confidence', it is easy to display 'confidence' when things are going well; when the CIA's cheap drug money is flowing in from Colombia and Afghanistan, and Fortune 500 corporations can drug launder it through their books, as cheap low interest loans, and thereby generate 'confidence' that their stock price should be valued (not for any ethical or transparent management, or real need economic products) higher than it should be. All investors are 'confident' because their stock prices are soaring. Is that real 'confidence'?

And lastly, my opinions may not find agreement here, with individuals who have different interpretations for 'economy', than I do. Those who prefer to keep the definition vague, may not realise they are not discussing the same thing.

Finally I do not -- yet -- agree with anyone who says economics is an exact science, anymore than psychologists who say psychology is an exact science. I have met too many people psychologists call 'crazy' or 'insane' to whom I spent a little bit of time REALLY, REALLY ACTIVELY LISTENING AND ASKING QUESTIONS WITH A TOTAL MIND, to be able to TOTALLY UNDERSTAND THE REASONS FOR THEIR ACTIONS, AS REASONABLE, BASED UPON THEIR EXPERIENCE.

I further don't recall meeting any economist who could explain to me how they could believe in economic growth living on a finite ecological resources planet.

The only ideas I believe in, are those whom I have asked myself the very serious question: DO I BELIEVE THIS IDEA AS TRUE, TO THE EXTENT THAT I AM WILLING TO TAKE A BULLET FOR IT? If yes, it's a belief. There are only a couple of 'beliefs' I believe, that I am willing to call beliefs; the rest are just ideas, or theories, sometimes useful and sometimes not; some may be true, some may be not.

One can "trust", regardless of certainty and knowledge (that's faith - the kind of unconditional trust described by Lara above). One can distrust but not be crippled by uncertainty, i.e. rationally distrust someone on the basis of knowledge and sound judgment (aka avoiding scoundrels and shysters as a matter of principle and habit).

But these are not what we are seeing. What we are seeing is distrust as a result of crippling uncertainty due to lack of reliable information. Real trust is highly conditional, even while being an indicator of robusticity of judgment (i.e. certainty). Proper trust is based on lots of information, sound judgment and knowledge, which together result in a (high) degree of certainty. But, just like profit estimates, that certainty can be revised downward at any time based on new information.

Clearly we have a mix of knowledgeable distrust (I do not doubt that my investments are down 40%), and lack-of-certainty distrust: What will the Fed do tomorrow? What company in my portfolio will crash next? Will I be able to get a job in two years? Where should I live? What should I buy? Investing in which companies, commodities and currencies will protect my money?

Uncertainty reigns, and the whims of bureaucrats are (in my view) the principle origin and continuing fuel for the chaos.

A discussion of knowledge is much more tractable and profitable than a discussion of ill-defined emotions whose roots lie in that other area of psychological phenomena: cognition.

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